Copper Shines a Ray of Hope

*** BREAKING NEWS *** The VIX or so-called "fear index" spiked 22.6% to close at 27.31. Any level above 25 indicates rocky market conditions may be ahead putting us in 4-WD on the Eureka Outlook Dashboard to your right. General Moly (GMO) and US Gold (UXG) were the only stocks that ended up for the day in the Eureka Miner's Grubstake Portfolio. The worst performer was POSCO, down 4.98%

Morning Miners!

It is 6:15 AM and that famous Raine's TGIF coffee has never tasted better. It might just be the pause that relieves a week of rough weather and rougher markets. Fears about China's monetary tightening and choppy earnings reports for the last quarter have sent gold below $1100, cratered oil and brought the broader markets to a net loss for the new year. To make matters worse, Goldman Sachs downgraded metals and the steel sector this morning. Ouch, that's a one-two punch for Eureka!

STOCKS NEWS US-Goldman downgrades metals, steel sectors

Aw come on Colonel, give us some hope on a Friday! OK, the weather is going to get better once the fourth Pacific storm passes and our old canary in the global recovery mine shaft, copper, is showing some spirit. Let's start with a short CNBC video of yesterday's interview with Feeport McMoRan (FCX) CEO Richard C. Adkerson. Freeport is the world's number two copper miner (note 1) and Adkerson is considered by some to be one of mining's best CEOs. You can find the video near the bottom of this blog.

This interview was conducted shortly after their quarterly report and FCX stock was down more than 8%. Their stock continues to get pummeled today after the Goldman downgraded FCX from "buy" to "neutral". Adkerson makes the point that last year also started out with a lot of glum opinions about China's economy. This was important then and is still relevant now because the greatest demand growth for copper and other base metals comes from China. Of course, China surprised everyone in 2009 and registered a GDP growth in excess of 10% last quarter. In Adkerson's words, "...for the time being, China looks very strong."

This strength has brought concerns of economic "overheating" and the recent moves by China's leaders to put the brakes on bank lending. From my viewpoint, the question is a matter of degree; if China's growth slows to 8 or 9% does the demand for metals drop off a cliff? For the now, I'll side with Adkerson's cautious optimism for 2010 although it is always scary to bet against Goldman (who have been fairly consistent in predicting a 2010 commodity correction since last fall: The Devil, Oil, Gold & Goldman). Here are some additional thoughts from this morning's Wall Street Journal:

"China bulls remain optimistic about that nation's appetite for commodities such as copper, iron ore, gold and aluminum. A combination of investment and stimulus packages have helped revive China's economy. Recent Chinese trade data showed imports surged 56% in December from a year earlier, while exports grew 17.7%.

But China's growth may face some obstacles of its own. China's central bank recently raised reserve requirements with an eye toward reducing speculative lending. Such moves could curb China's growth and, by extension, its appetite for commodities." (WSJ, 1/22/2010)

What does copper think? In early morning trading, copper was one of the few metals that up as gold and oil tumbled. Several days ago I ran my models of copper versus gold and copper versus oil and these charts are encouraging (a larger and more readable version is included at the bottom of this blog below the Adkerson interview).



In both cases copper is near or outside its expected range with good upward momentum in its 20-day moving average (large white arrow). If this trend continues, the ole Colonel will bet all these China jitters are a bit overdone and metals should recover.

On the other hand, there is caution in the wind. The VIX or "fear index" (what is this?) has moved close to the 25 level where the Report starts turning on caution lights after waddling around comfortably below 20 for most of the new year. Another worrisome sign is a technical "inversion" of gold and oil prices which (on a 3-month basis) began January 6th. An inversion means that oil prices move (on average) in the opposite direction to gold even though there can be days where both move up or down together. There were two inversions last year, 2/12 to 3/20 and 4/14 to 5/26. The first was quite possibly a precursor to the frightening stock market bottom in March (S&P 500 intraday low of 666.79 on 3/9/2009). Let's hope the current inversion does not repeat history.

Enough worrying about everything, let's walk the walk:

4-WD is OFF - the VIX or "fear index" remains below 25 but just barely, rougher markets may be ahead (what's this?)

Yellow light is ON for possible adverse regulation/legislation: Cortez Hills & mercury emissions

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Oil is down $0.44 in early trading to $75.64 (March contract, most active); Gold is down $17.4 to $1085.8 (February contract, most active); Silver is down $0.450 to $17.060 (March contract); Copper is up $0.0055 to $3.30.05 (March contract); Molybdenum is steady at $15.50

The DOW is down 25.01 points to 10364.87; the S&P 500 is down 4.22 points to 1112.26. The miners are mixed:

Barrick (ABX) $37.24 up 1.97%
Newmont (NEM) $45.46 up 2.30%
US Gold UXG) $2.36 up 0.21%
General Moly (Eureka Moly, LLC) (GMO) $2.74 up 4.58%
Thompson Creek (TC) $12.23 down 0.61%
Freeport McMoRan (FCX) $75.64 down 0.84% (a bellwether mining stock spanning gold, copper & molybdenum)

The Steels are mixed, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $42.58 up 0.50% - global steel producer
POSCO (PKX) $127.58 down 1.52% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.27% to $1,276,030.89(what is this?).

Cheers,

Colonel Possum

Note 1: Freeport McMorRan is the world's number two copper miner (after Chile's state-owned Codelco), a top five global gold miner, number one in molybdenum, and an upcoming leader in cobalt.

Headline Photograph by Mariana Titus